Where the Money Goes

31.0 What this chapter gives you#

1. You will be able to say who pays interchange and who receives it, and explain why the merchant is neither of those parties despite being the one out of pocket.
2. You will be able to break a merchant service charge into interchange, scheme fees and acquirer net revenue, and name the single component that is negotiable.
3. You will be able to explain why the issuer’s slice on a £480 corporate card ticket is over a thousand times the slice on a £4.20 debit card lolly when the ticket costs only 114 times as much.
4. You will be able to list the inputs a scheme’s rating engine uses to derive interchange, and say why a transaction’s rate is not knowable with certainty at the point of sale.
5. You will be able to state exactly how far the UK interchange caps reach, and name the exclusions — commercial cards, cash withdrawals, three-party schemes and any cross-border pair — that put a great deal of traffic outside them.
6. You will be able to explain why two identical £100 online sales can generate 30 pence and £1.50 of interchange, and why the merchant can neither detect, price for, nor decline the difference.
7. You will be able to name the four pricing models the regulator recognises and explain why over 95 per cent of merchants are on the one that shows them nothing.
8. You will be able to show, with arithmetic, why a merchant taking £2,000 a month through a single terminal can be paying 2.75 per cent before a single transaction has been rated.
9. You will be able to cite the article of the Interchange Fee Regulation that entitles a merchant to unblended pricing, and the article that entitles it to transaction-level interchange data.
10. You will be able to explain why a coffee shop’s effective rate can exceed an airline’s, and why neither merchant controls the thing that actually decides it.

The plain version#

The ice cream driver from the last chapter sold Amira a lolly for £4.20. On Friday afternoon, when Mr Doyle at the depot squares up the week and pays the drivers, that lolly appears on the driver’s payslip as £4.05.

The driver did not agree to a discount. Amira did not pay less. Fifteen pence went somewhere, and the driver has never met the person who took it.

Here is where it went, and the answer is stranger than anyone expects.

Start with Mrs Bello, who keeps the biscuit tin and the notebook. When the driver shouted down the street on Thursday, it was Mrs Bello who had to stop what she was doing, find Amira’s page, check the number, decide whether to say yes, write the slip and clip it on. It was Mrs Bello who took the risk that Amira’s page was wrong. It is Mrs Bello who has to argue with Amira in three weeks’ time when Amira insists she never bought the lolly at all. And it is Mrs Bello who has to give Amira her money back out of the tin if the lolly turns out to have been off, whether or not the driver ever gives it back to Mrs Bello.

Mrs Bello does all that work for the driver’s benefit. So Mrs Bello keeps a slice.

That slice is the thing the industry calls interchange, and it is the single most misunderstood number in the whole of payments, because it runs the wrong way. Ask anyone who pays it and they will say the shop pays it to the card company. Both halves of that are wrong. The shop’s bank pays it, and it goes to your bank. It is a payment from the seller’s side of the street to the buyer’s side of the street, and the seller has no relationship with the person receiving it and no ability to argue about the price.

Now the second slice. Somebody printed the notebooks. Somebody wrote the rules that say Mrs Bello must answer within two seconds, that the driver may not add a surcharge, that the Friday meeting happens at four o’clock on the corner and not whenever anyone feels like it. Somebody decides what happens when Amira and the driver disagree. That is Miss Vaughan, who owns the rulebook. She was never in the room when the lolly was sold and she never touches the money. She takes a small slice from Mrs Bello and a small slice from Mr Doyle, every week, for keeping the street running.

That slice is scheme fees, and Miss Vaughan is Visa or Mastercard.

And now the third slice, which is the only one that goes to somebody the driver has actually met. Mr Doyle at the depot collected the bundle, checked it, chased the missing lines, argued with Mrs Bello about the disputed lolly, and — this is the important bit — paid the driver on Monday even though the money from Mrs Bello did not arrive until Wednesday. If the driver takes a hundred pounds of orders and then vanishes, Mr Doyle is the one left holding it. For that, Mr Doyle keeps a slice too.

That slice is the acquirer’s margin.

Add all three together and you get the number the driver actually cares about, which is the gap between £4.20 and £4.05. In the trade the whole gap has a name: the merchant service charge, or MSC. It is not one fee. It is three fees wearing one coat, and only one of the three is negotiable with the person who sends the invoice.

Now the real numbers, and this is where it gets properly interesting.

The lolly. Amira paid £4.20 with an ordinary British debit card, tapped on the driver’s reader. The rate Mrs Bello is allowed to keep is 0.20 per cent. Twenty pence in every hundred pounds. On £4.20 that is 0.84 pence. Less than a penny. Mrs Bello did all that work — the check, the promise, the argument in three weeks, the refund risk — for less than one penny.

The aeroplane ticket. On the same afternoon, in an office two miles away, someone books a £480 flight on their company’s corporate card, typing the number into a website. The rate the issuer keeps on a British corporate Visa card used online is 2.00 per cent. On £480 that is £9.60.

Look at those two numbers side by side, because the arithmetic is the whole lesson. The ticket costs 114 times as much as the lolly. But the issuer’s slice on the ticket is 1,143 times as big. Not 114 times. Eleven hundred. The rate itself went up tenfold, from 0.20 per cent to 2.00 per cent, purely because of what kind of card it was and how it was used, and then that tenfold difference was multiplied by the hundredfold difference in price.

Two things caused that, and neither of them is anything the airline or the coffee shop did.

The first is what card it was. A consumer debit card and a corporate credit card are different products with different rules, and the law that holds the consumer card down to 0.20 per cent does not apply to the corporate one at all. Same plastic, same terminal, same two-second shout down the street, ten times the fee.

The second is how it was used. Tapped in a shop, with the card physically there, is the cheapest way a transaction can happen, because it is the hardest to fake. Typed into a website is more expensive, because it is easier to fake and somebody has to carry the loss when it is.

And there is a third thing that never shows up in a percentage at all. Almost every merchant’s contract has a fixed lump in it — call it five pence a transaction, for the message, the phone line, the reconciliation, the paperwork. Five pence on a £480 ticket is nothing, one hundredth of one per cent. Five pence on a £4.20 lolly is more than the entire interchange fee. The coffee shop is not paying more because coffee is a suspicious business. It is paying more because it sells cheap things, and every cheap thing carries the same fixed lump as an expensive one.

Now the last piece, and it is the piece that decides whether the driver can ever find any of this out.

Mr Doyle can send the driver a bill in one of two shapes. He can write: forty-one sales, one hundred and seventy-two pounds sixty, our rate one point four per cent plus five pence, total charge seven pounds four. That is one number, and it is called blended pricing, and the driver cannot tell from it whether Mrs Bello took a penny or a pound.

Or Mr Doyle can write: interchange £1.24, rulebook fees £0.61, our margin £5.19. Three numbers. That is called interchange plus plus, usually written IC++, and it is the only shape of bill in which the driver can see that Mr Doyle’s own slice is the biggest of the three.

Which is, of course, exactly why the second shape took a law to make available.

Where the plain version stops being true#

The merchant never pays interchange, and the moment of payment is not the moment of the sale. In the picture above, three people each take a slice out of one £4.20 as it travels. That is not what happens. Interchange is never invoiced, never transferred and never paid as a discrete event. It is a deduction: when the issuer settles with the scheme for the day’s clearing, it remits the transaction value less the applicable interchange, and the acquirer receives less than it presented. Nobody sends anybody a bill. And it is not calculated when the card is tapped — it is calculated at clearing, from the contents of the clearing record, a day or more later. This has a consequence the analogy hides completely: a transaction’s interchange rate is not knowable with certainty at the point of sale. It depends on data the merchant supplied, on whether the acquirer presented within the scheme’s time limits, and on how the scheme’s own rating engine classified the record. A transaction can be re-rated after the fact, and a merchant can be debited weeks later for the difference.

“Scheme fees” is not a fee. It is a catalogue. The single slice taken by Miss Vaughan is, in reality, several hundred separately named line items across two schemes, and they do not share a shape. Some are ad valorem, charged as basis points on transaction value. Some are a fixed amount per authorisation message, charged whether the authorisation was approved or declined. Some are charged per settled transaction, some per chargeback, some per BIN per year, some per licence. Some are charged only when the merchant behaves in a way the scheme wishes to discourage — presenting late, using a terminal that cannot do EMV, exceeding a fraud ratio. Some are charged on refunds. And a large fraction of them are charged not to the acquirer at all but to the issuer, which means the merchant never sees them and never pays them, but they still shape the economics of the card in the merchant’s terminal. Any sentence of the form “scheme fees are about X per cent” is a statistical summary of a mess, not a description of a price.

The caps are far narrower than the phrase “regulated interchange” suggests. The 0.2 per cent and 0.3 per cent figures are real, statutory, and — in the UK — apply only where the transaction is a consumer card transaction, on a four-party scheme, with the payer’s payment service provider and the payee’s payment service provider both located in the United Kingdom. Commercial cards are excluded by the legislation itself. Cash withdrawals are excluded. Three-party schemes are excluded unless they license others. And a transaction where either side of the pair sits outside the UK falls outside the caps entirely, which is not an oversight but the mechanism by which cross-border interchange rose by a factor of five after 2021. “Regulated” describes a subset of British card traffic, not British card traffic.

Blended versus IC++ is not the choice most merchants face, because most merchants have neither. The Payment Systems Regulator found that over 95 per cent of acquirers’ merchants are on what it calls standard pricing, which is defined by exclusion: it is not IC+, not IC++, and not fixed. Standard pricing is a handful of headline rates attached to broad transaction categories, plus a tail of additional fees triggered by events. It resembles blended pricing in that the merchant cannot see the components, but it is not one blended rate either — it is several, and which one applies to a given sale depends on classifications the merchant was never shown. A merchant asking “am I on blended or IC++?” is usually asking a question with a third answer.

The technical version#

The four amounts, and the direction each one travels#

There are exactly four money-flows in the fee structure of a four-party card transaction, and the entire subject becomes tractable once their directions are fixed.

The Payment Systems Regulator’s formulation, from its card-acquiring market review, is the one to memorise: the MSC “is the total amount it pays for card-acquiring services to its acquirer”, and it comprises interchange fees paid by the acquirer to the issuer, scheme fees paid by the acquirer to the scheme operator, and the remainder, which the PSR calls acquirer net revenue.

That remainder is the only component the merchant can negotiate, and it is the only component the acquirer keeps. Everything else is pass-through, whether or not the merchant’s contract admits it.

The word “scheme fees” in that formulation is doing more work than it appears to. Mastercard and Visa charge acquirers for two logically distinct things: scheme services, meaning membership, licensing, brand, rules and dispute machinery; and processing services, meaning authorisation switching, clearing and settlement. The PSR treated these separately in its market review precisely because they behave differently — it concluded that fees for scheme services paid by UK acquirers approximately doubled per pound transacted between 2014 and 2018, while it found insufficient evidence to conclude that processing fees had risen over the same period. A merchant statement that lumps both into one “scheme fee” line is discarding the distinction that matters most.

How interchange is actually determined#

Interchange is not negotiated, not quoted and not chosen. It is derived, by the scheme’s rating engine, from the contents of the transaction record at clearing. The merchant’s only influence is over what data reaches that record.

The inputs are, in rough order of importance:

The issuer’s product and country, taken from the primary account number carried in DE2 and resolved through the BIN to a specific card product — consumer debit, consumer credit, consumer prepaid, business debit, corporate, purchasing, and their platinum and infinite variants — and to an issuing country. A single-digit difference in the BIN changes the applicable fee by an order of magnitude, and the merchant cannot see it.

The acquirer’s country, which together with the issuer’s country determines whether the transaction is domestic, intra-regional or inter-regional. This is the axis on which the regulatory caps live or die.

The channel and authentication, expressed in the clearing record through the point-of-service entry mode, the terminal’s capability indicators and the presence of EMV data in DE55 for chip transactions, or of an authentication value for e-commerce transactions authenticated through 3-D Secure. Visa’s schedules name these tiers Secure and Non-Secure; Mastercard’s name them Merchant UCAF, Full UCAF, Enhanced Electronic and Base. Falling out of the top tier is what practitioners call a downgrade, and Visa’s own commercial schedules label the bottom tier Non-Qualified.

The merchant category code, carried in DE18, four numeric digits, the field ISO 8583 names Merchant type. The code set is standardised in ISO 18245, Retail financial services — Merchant category codes, whose current edition is ISO 18245:2023, superseding the 2003 first edition. MCCs are not decorative. Visa’s published UK schedule conditions several programmes on specific codes: the Me-to-Me Program applies to MCC 6012 (financial institutions), MCC 6211 (security brokers and dealers) and MCC 9399 (government services, not elsewhere classified); the tax-payment variant applies to MCC 9311 (tax payments). In Visa’s intra-EEA schedule, MCC 8398 (charitable and social service organisations) attracts its own capped commercial rates. A merchant boarded under the wrong MCC pays the wrong interchange indefinitely and will never be told.

The amount and currency, from DE4 and DE49 respectively, which matter because a great many rates are percentages subject to a fixed cap, or fixed amounts subject to a percentage floor, and because Visa operates explicit large-ticket programmes with value thresholds.

Finally, timeliness and data completeness. Interchange schedules for commercial and purchasing cards pay explicit incentives for enhanced data. Visa’s intra-EEA schedule states that “Visa Purchasing acquirers may receive an additional interchange incentive of €0.50 if they submit the transaction with additional data: ‘Visa Global Invoicing System and Line Item Detail’”, and that fleet acquirers may receive an additional 0.30 per cent for submitting Level 2 and Level 3 data at fuel-related MCCs. In the UK schedule the equivalents appear as deductions from the headline rate: Visa Purchasing card-not-present is 2.00 per cent, or 2.00 per cent less £0.32 with Line Item Detail, or 2.00 per cent less £0.16 with Summary Tax.

Note what none of these inputs is. None of them is the merchant’s size, the merchant’s bargaining power, or the merchant’s contract. Interchange is identical for the corner shop and the supermarket on identical transactions. Everything that differs between them differs in the other two components.

The published rates, as of August 2026#

The schemes publish their interchange schedules. The following are drawn from those published documents; each carries the effective date of the schedule it came from, because these documents are revised on a rolling basis and a figure without a date is a liability.

Mastercard, UK intra-country, consumer, schedule valid from 23 April 2022:

The flatness of that table is the regulation showing through. Every consumer tier sits exactly at the statutory ceiling, and the tier structure — which in an unregulated market would spread the rates by a factor of two or three — does nothing at all. The tiers still exist because the same schedule shape is used everywhere; in the UK consumer segment they have been squeezed flat.

Mastercard, UK intra-country, commercial, schedule valid from 22 January 2021, where the same tier structure does its normal work: commercial debit at 0.70 per cent contactless and chip-and-PIN, rising to 1.10 per cent for Enhanced Electronic and Base, with a cap of GBP 1.50 on certain programmes; commercial credit at 1.50 per cent contactless rising to 1.90 per cent Base.

Visa, UK domestic, commercial, schedule effective February 2026:

Two further rows in that schedule are worth knowing because they are counter-intuitive. Visa Business Credit — Small Market Expense is a flat 0.30 per cent, and Visa Corporate — Large Market Enterprise is likewise 0.30 per cent. There exist commercial card programmes that interchange at the consumer credit rate. The generalisation “commercial cards are expensive” is a good default and a bad certainty.

Visa, intra-EEA consumer, schedule effective April 2025, applicable to EEA-issued cards at EEA merchants in a different country: Visa Consumer Debit, Visa Consumer Prepaid, V PAY Debit and V PAY Prepaid at 0.20 per cent across contactless, secure and non-secure; Visa Consumer Credit and Visa Consumer Deferred Debit at 0.30 per cent across the same tiers.

Visa, inter-EEA consumer, effective 19 October 2019, applicable to consumer cards issued outside the EEA transacting at EEA merchants:

That last table is the one to hold onto, because those four numbers — 0.20, 1.15, 0.30, 1.50 — recur throughout the regulatory history of the last seven years, and the same four numbers will reappear below in an entirely different context.

The caps: what the law says, and exactly how far it reaches#

The instrument is Regulation (EU) 2015/751 of the European Parliament and of the Council of 29 April 2015 on interchange fees for card-based payment transactions, universally called the Interchange Fee Regulation or IFR. Its operative caps took effect on 9 December 2015.

Article 3 provides that “Payment service providers shall not offer or request a per transaction interchange fee of more than 0,2 % of the value of the transaction for any debit card transaction.” Article 4 provides the same for credit cards at 0,3 %. Article 3 also permitted Member States to allow a flat per-transaction alternative of no more than EUR 0.05, alone or combined with the percentage, and permitted — until 9 December 2020 only — a domestic weighted-average approach for debit. That transitional route has now expired everywhere; the per-transaction cap is the live rule.

The methodology behind the two numbers is stated in the recitals rather than the articles. Recital 20 records that the caps are based on the Merchant Indifference Test, sometimes called the tourist test: the fee level at which a merchant would be indifferent between being paid by card and being paid in cash, having compared the costs of each. Whatever one thinks of the answer, it is worth knowing that the answer was computed rather than bargained.

The scope limits are in Article 1. Chapter II — which is where the caps live — does not apply to transactions with commercial cards, to cash withdrawals at ATMs or at the counter of a payment service provider, or to transactions with payment cards issued by three-party payment card schemes. Article 1(5) then closes the obvious loophole: where a three-party scheme licenses other payment service providers to issue or acquire, or issues with co-branding partners or through agents, it is considered to be a four-party scheme and the caps bite.

In the United Kingdom the instrument in force is the retained version of that Regulation as amended by the Interchange Fee (Amendment) (EU Exit) Regulations 2019 (SI 2019/284). The territorial scope was rewritten on withdrawal: the retained Regulation applies to card-based payment transactions in the United Kingdom where both the payer’s and the payee’s payment service providers are located in the United Kingdom. The Payment Systems Regulator is the lead competent authority, designated by HM Treasury, with enforcement powers under the Payment Card Interchange Fee Regulations 2015. The PSR states the position plainly: consumer cross-border card payments between the UK and the EU, or any other third country, where either the acquirer or the issuer is based outside the UK’s jurisdiction, are no longer subject to the interchange fee caps.

Three further articles of the IFR shape the merchant’s bill and are routinely forgotten.

Article 5 provides that any agreed remuneration, including net compensation, with an equivalent object or effect to an interchange fee shall be treated as part of the interchange fee. This is the anti-circumvention rule, and it is why a scheme cannot simply route a rebate to issuers by another name.

Article 9 is the unblending rule, and it is the legal foundation of interchange-plus-plus pricing. An acquirer must charge its merchant “merchant service charges individually specified for different categories and different brands”, unless the merchant requests blended charges in writing, and the agreement must contain individually specified information on the amount of the merchant service charges, interchange fees and scheme fees for each category and brand. IC++ is not a product the industry invented out of generosity. It is a statutory entitlement that most merchants have contracted out of without noticing.

Article 12 requires that, after execution, the acquirer provides the merchant with a reference enabling the transaction to be identified, the amount, and the charges, “indicating separately the merchant service charge and the amount of the interchange fee”. Every merchant in the UK is entitled to transaction-level interchange data. Most have never asked for it.

Article 10 abolishes the honour-all-cards rule across categories — a merchant that accepts a scheme’s consumer debit cards is not thereby obliged to accept its commercial cards — and Article 11 prohibits scheme rules that stop merchants steering customers towards a cheaper instrument or telling them what the fees are. Between them, these are the merchant’s only real weapons against expensive card types, and both are underused.

All statements in this subsection describe the position as at August 2026. The UK’s regulatory architecture is itself in motion: HM Treasury’s consultation response of 21 April 2026 confirmed the government’s intention to consolidate the Payment Systems Regulator entirely within the Financial Conduct Authority, transferring the PSR’s functions including those under the Payment Card Interchange Fee Regulations 2015, subject to primary legislation.

The cross-border hole, which is where the money went#

If the caps apply only when issuer and acquirer are both in the UK, then a very large volume of British card traffic sits outside them, and after 2021 the schemes repriced it.

For UK–EEA consumer transactions, the PSR’s market review of UK-EEA consumer cross-border interchange fees, final report MR22/2.7 published 13 December 2024, records the change precisely. Fees on card-not-present transactions moved from 0.2 per cent to 1.15 per cent for debit and from 0.3 per cent to 1.5 per cent for credit — a fivefold increase on both. Visa announced in March 2021 and implemented in October 2021; Mastercard announced in the third quarter of 2021 and implemented in April 2022. Card-present rates were left at 0.2 and 0.3. The increases applied to what the PSR calls outbound interchange fees, being those on EEA-issued cards used at UK merchants, which is a cost falling on UK merchants and their acquirers. The PSR estimated the additional cost to UK service users at approximately £150 million to £200 million per year.

The PSR found that Mastercard and Visa were not subject to effective competitive constraints and had raised these fees to an unduly high level, and consulted on a two-stage remedy: an interim cap restoring 0.2 per cent for debit and 0.3 per cent for credit on UK-EEA consumer card-not-present transactions, followed by a lasting cap set by a fuller methodology. As of the review page’s October 2025 update, the PSR had decided not to proceed with the interim cap, citing litigation concerning its powers to impose price caps, and was instead consulting on the methodology for a longer-term cap. As of August 2026, therefore, the 1.15 and 1.5 rates remain in force and no UK statutory cap constrains them.

For inter-regional transactions — a card issued outside the EEA presented at an EEA merchant — the constraint is not a statute but a competition settlement. On 29 April 2019 the European Commission accepted commitments from Mastercard and Visa, making them legally binding, that cut inter-regional interchange by around 40 per cent on average to the four rates in the table above: 0.2 and 1.15 for debit card-present and card-not-present, 0.3 and 1.5 for credit. Those commitments ran to November 2024, at which point both schemes voluntarily extended the same levels to November 2029, an extension of which the Commission took note. This is a materially weaker form of protection than a cap in a regulation, and it has a stated end date.

The consequence for a merchant is worth stating in one sentence. Two identical £100 online sales, one to a customer holding a British consumer credit card and one to a customer holding a French consumer credit card, generate interchange of 30 pence and £1.50 respectively — five times the fee, for a difference the merchant cannot detect, cannot price for, and cannot decline without breaching its own acquiring agreement.

Scheme fees, named#

Scheme fees are opaque by construction, but they are not unknowable, because the PSR’s market review of card scheme and processing fees put a number of them on the public record.

On the Visa side, the review documents flat acquiring fees introduced in 2017 — Acquirer Service Fees for card-present and card-not-present — set at 1 basis point for debit transactions and 1.4 basis points for credit. It records the International Acquiring Fee rising from 30 to 45 basis points, and the International Service Assessment Fee rising from 10 to 55 basis points across 2018 to 2020. It records that when UK-EEA traffic became cross-border in 2021, Visa set the International Acquiring Fee on it at 10 basis points for card-present and 25 basis points for card-not-present — a scheme fee increase layered on top of the interchange increase described above, on the same transactions.

On the Mastercard side, the review documents a Switch Pricing Strategy revision of mandatory fees in 2017; a specific card-not-present fee charged to both acquirer and issuer from 2018; the extension of credits and returns scheme fees to credit transactions in 2018, which is the answer to the perennial question of whether refunds are free; a revision of MOTO fee drivers in 2020; a revision of the Acquiring Volume Fee in 2021 that eliminated the minimum volume fee; and mandatory Mastercard Cyber Secure fees in 2021. It also documents behavioural pricing on both sides — Mastercard’s non-EMV non-contactless fee from 2019, charged on terminals not meeting the standard, and Visa’s Negative Response Fee, removed in 2021 and replaced on the issuing side by a Minimum Approval Rate Integrity Fee. And it documents a structural trick that recurs: services converted from opt-in to opt-out, so that the fee begins to apply unless the participant acts. Mastercard’s AAV validation went that way in 2019; Visa’s analytics platform likewise.

The aggregate findings are the ones to quote. The PSR’s final report MR22/1.10, published 6 March 2025, concluded that Mastercard and Visa had increased their core scheme and processing fees to acquirers by at least 25 per cent since 2017, amounting to at least £170 million extra per year for UK businesses, and that the two schemes were not subject to effective competitive constraints. In its consultation paper CP25/3 of December 2025 the PSR proposed two remedies by direction on Mastercard and Visa: an information, transparency and complexity remedy requiring the schemes to give acquirers clear and accurate information about existing, new and modified fees, with twelve months to comply after final directions; and a pricing governance remedy requiring pricing decisions to be documented with evidence of how the interests of service users were considered, with four months to comply. Responses were due by 13 February 2026, with a third remedy on regulatory financial reporting deferred to a consultation by 31 March 2026.

Note what is being remedied. Not the level of the fees. The legibility of the fees.

The acquirer’s share, and everything else on the invoice#

Acquirer net revenue is defined by subtraction: MSC less interchange less scheme fees. It is the price of the acquirer’s own service, and it covers the settlement risk the acquirer carries between funding the merchant and being made whole, the chargeback exposure, the underwriting, the reconciliation, the support, and the capital.

For the five largest UK acquirers — Barclaycard, Elavon, Global Payments, Lloyds Bank Cardnet and Worldpay — the PSR found that acquirer net revenues for card-acquiring services accounted for 62 per cent of total revenues, with card acceptance devices and payment gateways contributing 15 per cent and value-added services the remaining 23 per cent. Slightly more than a third of what a merchant pays its acquirer, in aggregate, is not for acquiring at all.

That surrounding third arrives as a tail of additional fees, and it is where the effective rate of a small merchant is actually decided. The PSR’s description of standard pricing is worth reproducing in substance: several headline rates applied to different types of purchase transaction, each of which can be a pence-per-transaction fee, an ad valorem fee or a combination; plus one or more additional fees triggered either by specific events such as chargebacks, refunds and PCI DSS non-compliance, or by specific transaction types such as e-commerce. Add to this the minimum monthly service charge, which some acquirers apply when a merchant’s monthly spend falls below a threshold; the monthly fee for PCI DSS compliance services; and terminal hire, which the PSR put at typically £10 to £40 per month per device, against card readers sold outright by the largest payment facilitators for between £15 and £45.

A merchant taking £2,000 a month through a single terminal, paying £25 for the terminal, £10 for PCI compliance and a £20 minimum service charge, is paying £55 in non-transactional fees. On £2,000 of turnover that is 2.75 per cent before a single transaction is rated. This is the arithmetic that explains why the very smallest merchants overwhelmingly use payment facilitators with a single headline rate and no monthly fees, even though that headline rate is higher: the PSR found the largest payment facilitators serve nearly 80 per cent of merchants with annual card turnover up to £15,000, and fewer than 5 per cent of small and medium merchants with turnover above £60,000. The crossover is real and it is arithmetic, not marketing.

The four pricing models, stated exactly#

The PSR’s taxonomy is the authoritative one and the four definitions are worth having verbatim in substance.

Standard pricing is pricing where, for any given transaction, the acquirer does not automatically pass through at cost the interchange fee applicable to that transaction, and which does not satisfy the criteria for IC+, IC++ or fixed pricing.

Interchange fee plus (IC+) is pricing where, for any given transaction, the acquirer automatically passes through at cost the interchange fee applicable to that transaction. Scheme fees remain inside the acquirer’s margin.

Interchange fee plus plus (IC++) is pricing where, for any given transaction, the acquirer automatically passes through at cost both the interchange fee and the scheme fees applicable to that transaction.

Fixed pricing is where the merchant pays a fixed periodic fee for card-acquiring services whose amount does not depend on the volume or value of transactions accepted or their characteristics, within specified limits; the acquirer may separately pass through at cost any scheme fees not directly attributable to transactions.

Over 95 per cent of acquirers’ merchants are on standard pricing. IC++ is concentrated at the top of the market, and the PSR estimated that for merchants with annual card turnover above £50 million on IC++ pricing, the benefit of the IFR savings was around £600 million in 2018 — because on IC++ a cut in interchange reaches the merchant automatically. For small and medium merchants the same review found, on average, little or no pass-through of the IFR savings, while acquirers may have passed on nearly all of the scheme fee increases. The pricing model is not a presentational choice. It determines who keeps the benefit of regulation and who absorbs the cost of scheme repricing.

Why the coffee shop and the airline pay different effective rates#

Assemble the pieces and the answer has five independent components, none of which is “the airline negotiated better”, although the airline did.

Ticket size. Fixed per-transaction elements — authorisation fees, per-item scheme fees, the pence component of a headline rate — are constant in pence and therefore hyperbolic in percentage terms. A 5p fixed element is 1.19 per cent of a £4.20 coffee and 0.01 per cent of a £480 fare. Nothing else in the stack produces a hundredfold difference this cheaply.

Card mix. The coffee shop’s traffic is overwhelmingly UK consumer debit, capped at 0.20 per cent. The airline’s traffic is heavy in commercial and corporate cards — the very products the IFR excludes — where Visa’s published UK card-not-present rate for Visa Corporate is 2.00 per cent. A merchant whose customers pay with company cards is structurally, permanently more expensive to serve, and can do nothing about it except invoke Article 10 and refuse the category, which no airline will do.

Channel. The coffee shop is card-present, contactless, EMV, in the top interchange tier and the lowest fraud-liability position. The airline is card-not-present, which raises interchange on cross-border and commercial traffic, attracts card-not-present scheme fees on both sides, carries higher chargeback exposure, and — for cross-border consumer cards — is precisely the channel where UK-EEA interchange went to 1.15 and 1.5 per cent.

Region. The coffee shop’s customers are almost all UK-issued. The airline’s are, by the nature of the business, spread across the EEA and the rest of the world, which means a material fraction of its interchange is not capped at all, plus international acquiring and service assessment fees on top.

Merchant category code. The airline’s MCC signals a delayed-delivery business: the customer pays in March and flies in August, and if the airline fails in June the acquirer is exposed to every unflown ticket. That risk is priced in acquirer net revenue and in collateral, not in interchange, and it is why the PSR observed that Elavon specialises in serving airlines, “which carry a higher credit risk than many other merchants”. The airline’s low headline rate frequently coexists with a rolling reserve that costs it more in working capital than the whole MSC.

Size, last and least interesting. The PSR’s segmentation shows why bargaining power concentrates where it does: merchants with annual card turnover above £50 million are 0.1 per cent of merchants and 76 per cent of transaction value, while merchants below £380,000 are 93.7 per cent of merchants and 6.5 per cent of value. The PSR found the market working adequately for the first group and not working well for everyone below £50 million.

One transaction, priced twice#

The following puts the whole chapter into two columns. The interchange figures are published scheme rates as cited above. The scheme fee and acquirer margin figures are illustrative of a plausible contract and are marked as such — they are not published rates, and no merchant should treat them as a benchmark.

And now the twist that makes the table worth printing. On these assumptions the airline’s effective rate is lower than the coffee shop’s, but barely — and the reason is not that the airline is being overcharged. It is that the airline’s customer used a corporate card. Rerun the same £480 sale on a UK consumer credit card at 0.30 per cent and the interchange falls from £9.60 to £1.44, the MSC falls to about £2.51, and the effective rate falls to 0.52 per cent. Same merchant, same channel, same acquirer, same day, five times the difference, decided entirely by which piece of plastic came out of the wallet.

The coffee shop cannot reach 0.52 per cent by any means available to it, because at £4.20 a transaction the fixed components dominate everything else. The airline reaches it or does not reach it depending on its customer mix, which it does not control either.

Which is the honest ending to this chapter. Almost none of what a merchant pays is set by the merchant, or by the party that invoices the merchant, or in the country the merchant trades in. It is set in a rate schedule published by a company the merchant has no contract with, applied to a card issued by a bank the merchant has never dealt with, through a rating engine the merchant cannot see, a day after the sale. The only two levers a merchant genuinely holds are the acquirer’s own margin, which is typically the smallest of the three components on a large ticket and the largest on a small one, and the shape of the bill — because a merchant who cannot see the three components separately cannot tell which lever to pull.

That is what Article 9 was for. Ask for it in writing.

31.98 Common wrong ideas#

Wrong: The merchant pays interchange to Visa or Mastercard. Right: The acquirer pays it to the card-issuing bank; the scheme is not the recipient and the merchant is not the payer, and the merchant has no relationship with the party that receives it.

Wrong: Interchange is a fee that somebody invoices. Right: It is a deduction taken when the issuer settles with the scheme for the day’s clearing, so no bill for it is sent to anybody and no discrete transfer of it ever happens.

Wrong: The interchange rate is fixed at the moment the card is tapped. Right: It is derived at clearing from the contents of the clearing record, so a transaction can be re-rated afterwards and a merchant debited weeks later for the difference.

Wrong: Scheme fees are a percentage you can quote. Right: They are several hundred separately named line items across two schemes, some ad valorem, some per authorisation message whether approved or declined, some per chargeback, per BIN or per licence, some charged only on behaviour the scheme wishes to discourage, and many charged to the issuer where the merchant never sees them.

Wrong: UK interchange is regulated, so the caps apply to UK card payments. Right: The caps apply only to consumer card transactions on four-party schemes where the payer’s and the payee’s payment service providers are both located in the United Kingdom, which leaves commercial cards, cash withdrawals and every cross-border pair outside them.

Wrong: Commercial cards are always expensive. Right: Visa Business Credit Small Market Expense and Visa Corporate Large Market Enterprise both interchange at 0.30 per cent, the consumer credit rate, so the generalisation is a good default and a bad certainty.

Wrong: A merchant chooses between blended pricing and IC++. Right: Over 95 per cent of merchants are on standard pricing, which is neither: several headline rates attached to broad categories, plus a tail of event-triggered fees, with the classifications that decide which rate applies never shown to the merchant.

Wrong: Large merchants get better interchange than small ones. Right: Interchange is identical for the corner shop and the supermarket on identical transactions, and everything that differs between them differs in the acquirer’s margin and the scheme fees.

Wrong: IC++ pricing is a concession an acquirer may or may not grant. Right: Article 9 makes individually specified charges the default entitlement, and blending requires the merchant to ask for it in writing, which is a statutory right most merchants have contracted out of without noticing.

Wrong: A low headline rate means a cheap merchant account. Right: Terminal hire, a PCI compliance fee and a minimum monthly service charge can amount to 2.75 per cent of a small merchant’s turnover before a single transaction has been rated, which is the arithmetic that sends the smallest merchants to payment facilitators.

31.99 Chapter summary in 20 lines#

1. The gap between what a customer pays and what a merchant receives is called the merchant service charge, and it is three fees wearing one coat.
2. Interchange runs from the acquirer to the issuing bank, which is the opposite direction from the one almost everybody assumes.
3. Scheme fees go from both the acquirer and the issuer to Visa or Mastercard, for the rulebook, the brand, the dispute machinery and the switching.
4. Acquirer net revenue is what is left after those two, and it is the only component the merchant can negotiate.
5. Interchange is never invoiced: the issuer remits the transaction value less the applicable fee, and the acquirer simply receives less than it presented.
6. It is also derived rather than quoted, computed by the scheme’s rating engine at clearing, which means it is not certain at the point of sale and can be re-rated later.
7. The inputs are the issuer’s product and country, the acquirer’s country, the channel and authentication tier, the merchant category code, the amount and currency, and the completeness of the data submitted.
8. None of those inputs is the merchant’s size, its bargaining power or its contract, so interchange is the same for the corner shop and the supermarket.
9. The statutory caps of 0.2 and 0.3 per cent come from the Interchange Fee Regulation and were computed by the Merchant Indifference Test rather than bargained.
10. Those caps reach only consumer cards on four-party schemes with both payment service providers in the United Kingdom, excluding commercial cards, cash withdrawals and all cross-border traffic.
11. That exclusion is where the money went: UK-EEA consumer card-not-present interchange moved from 0.2 to 1.15 per cent for debit and 0.3 to 1.5 per cent for credit, at an estimated cost to UK service users of £150 million to £200 million a year.
12. Inter-regional rates sit at the same four numbers, but by a competition settlement with a stated end date rather than by statute, which is materially weaker protection.
13. Scheme fees are not one price but a catalogue of several hundred items of different shapes, some charged on declines, some on refunds, and many charged to issuers where the merchant never sees them but still feels the economics.
14. The regulator found scheme and processing fees to acquirers up by at least 25 per cent since 2017, worth at least £170 million a year, and proposed remedies aimed at the legibility of those fees rather than their level.
15. Over 95 per cent of merchants are on standard pricing, in which the components are invisible and the applicable headline rate depends on classifications the merchant was never shown.
16. Article 9 makes unblended charges a statutory entitlement and Article 12 entitles every merchant to transaction-level interchange data, and most merchants have never asked for either.
17. Slightly more than a third of what merchants pay their acquirers in aggregate is not for acquiring at all, but for devices, gateways and value-added services.
18. Fixed per-transaction elements are constant in pence and therefore hyperbolic in percentage terms, which is why the coffee shop’s effective rate can exceed the airline’s.
19. Rerun the same £480 sale on a consumer credit card rather than a corporate card and the effective rate falls from about 2.22 per cent to about 0.52 per cent, decided entirely by which piece of plastic came out of the wallet.
20. Almost nothing a merchant pays is set by the merchant, by the party that invoices the merchant, or in the country the merchant trades in, so the only genuine levers are the acquirer’s own margin and the shape of the bill.

Sources: Regulation (EU) 2015/751 (Articles 1, 3, 4, 5, 9, 10, 11, 12 and Recital 20) as retained in UK law and amended by the Interchange Fee (Amendment) (EU Exit) Regulations 2019; Payment Systems Regulator MR18/1.8, MR22/1.6, MR22/1.10, CP25/3 and MR22/2.7 and its IFR guidance pages; European Commission press release IP/19/2311; published interchange schedules of Visa (UK, intra-EEA and inter-EEA) and Mastercard (UK intra-country); ISO 8583 and ISO 18245:2023; HM Treasury, “A Streamlined Approach to Payment Systems Regulation” consultation response; UK Finance card spending statistics.